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Time to overhaul our inept corporate governance

The law favours companies. It is not there to protect the shareholders who own the companies.
Never going to happen … the law requires that shareholders persuade the very directors accused of not doing their jobs to permit the company to take legal action against them. Image: Martin Leissl, Bloomberg

If you were listening carefully last week you might have heard the sound of champagne corks popping in boardrooms all across the corporate landscape. The celebrations were sparked by the South Gauteng High Court’s confirmation of what most of those in the know already knew – directors are, by and large, safe from shareholders seeking recompense for value destruction.

Judge David Unterhalter told lawyers acting for a swathe of Steinhoff shareholders who wanted to hold the Steinhoff directors accountable for the destruction in the value of their shares that there was no point certifying their class action because it would fail in the courts. Company law was not on their side, said Unterhalter.

Read: Court blow for Steinhoff shareholders

Days later, in a completely different case, the Supreme Court of Appeal (SCA) told the directors of Hlumisa (African Bank’s BEE shareholders) the same story. Hlumisa was claiming damages against the directors of African Bank for the collapse in the value of their shares on the grounds that the directors had acted in bad faith, for ulterior purposes, and without the requisite degree of care, skill and diligence in breach of the provisions of the Companies Act. Hlumisa had failed to persuade the lower court of its case and had appealed to the SCA. Last week the SCA dismissed the appeal.

Essentially the courts argued the value destruction had been done to the company and not the shareholders and so it is the company that must go after the directors.

(Anyone looking for a more scholarly interpretation is urged to read the 100-page ruling by the South Gauteng High Court or, better still, the SCA ruling.)

‘Derivative action’

So, if shareholders want to go after directors who appear to have breached their fiduciary duties, they have to do it through the company. It’s called a derivative action.

This of course means persuading the very directors accused of not doing their job to allow the company to take action against them.

As you can imagine, unless the National Prosecuting Authority gets its act together, there’s little chance of even former Steinhoff CEO Markus Jooste being called to account.

And it’s not just the Steinhoff and African Bank directors who are off the hook.

The courts have reassured every useless director who pitches up unprepared to board meetings that they need not worry – the chances of them being held to account are vanishingly slight.

Sadly that wasn’t the end of the blows to any notion that we have a rigorous well-functioning corporate governance regime.

Mid-week the JSE announced it was fining Tongaat R7.5 million (R2.5 million of it suspended) because the accounts it produced between 2011 and 2018 were “incorrect, false and misleading”. Presumably it fined the company on the basis of the same logic used in the above two court actions. So there’s a sort of legal consistency. But what an absolute travesty, just as Tongaat was getting back on its feet under new and much improved management.

As one commentator remarked: “Yay, the cavalry rides into the battle field and bayonet the wounded.”

And how comforted should we all be that the chair of Tongaat’s audit committee during that period is now ensconced in a powerful oversight position where she is required to pass judgement on the quality of auditors in this country?

The courts’ decisions were based on what the law allows; the JSE’s action was based on the JSE’s regulations. And the beneficial shareholders, the ultimate owners, end up with a dog’s breakfast.

Chilling insights

But the week was not over. There was more to come. Advocacy group Open Secrets released a chilling account of the value destruction wreaked upon the economy by a seemingly hopelessly inept (at times possibly criminally so) audit profession.

Read: How the auditors keep dodging the fraud bullet

The 86-page report makes for grim but fascinating reading, with our big law firms also shown to be part of the country’s corruption problem.

Essentially, our corporate governance is in a value-destroying downward spiral mess. And much of that mess is due to the ‘leaders’ – the directors, the auditors, the regulators, the lawyers.

As the Open Secrets report notes, many of them are enablers. But why would they bother stopping the rot when there’s so much fee income to be made out of creating it and then cleaning it up.

They have gone rogue and we have no way of reining them in – they are holding the reins.

The institutional shareholders with their tick-all-the-boxes stewardship codes and ‘behind closed doors’ discussions are part of the problem, as is the King Code, to which they slavishly adhere in form but seldom substance. These well-resourced and powerful shareholders inevitably pitch up at the scene of the latest corporate implosion looking perplexed and wondering how their crony-style exhortations with the top executives could have been so unsuccessful.

How might things look without any codes?

It’s difficult to imagine how much worse the corporate landscape would be without all these codes and private discussions.

Four iterations of the King code have done nothing more than spawn an industry of overpaid self-appointed enforcers who appear to do almost no enforcing.

A fifth iteration will not be tolerated because the likely authors of such a code – auditors, directors, lawyers – are no longer trusted.

It is time to look to the smaller players for a way out of the governance morass; independent and irritatingly dogged players such as Just Share and Active Share, or activist investors such as Theo Botha, Chris Logan and Albie Cilliers.

These are the kind of people who really do understand that if their children are to thrive their investee companies must thrive.



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Indeed! Most important!

Very well said, Ann!

The place for shareholder activism to start is Parliament.

Don’t forget the naughty boys and girls at Tongaat Hulett …

The problem is well stated but alas the transfer of wealth has been operating for so long in clear view that it has dis-empowered the people. The victims have been increasingly powerless to resist these immoral forces which have, with malice and forethought, set themselves in such untouchable and unreasonable control that only the total destruction of all can reset things into a state of prospective fairness. But a brave new world will most probably worm its way to the same self-destruction. The dark side of human nature is a curse from the devil. Such a popular deity as the end of everything approaches.

I personally do not expect the courts to protect the investor in a battlefield of money and wrongdoing. When I invest in a bourse registered entity I do so on the trust that such a bourse would not accept membership from entities that have neither integrity nor the fit for purpose ethical professionalism. I do not expect companies no their directors to be saints but on the least I expect them to respect bourse on which their names and expertise are held in high esteem.

My money in the pension fund,unit trusts or equities through brokerage companies, I sleep well at night because the bourse is watching, e.g. the JSE.

”Four iterations of the King code have done nothing more than spawning an industry of overpaid self-appointed enforcers who appear to do almost no enforcing”

Who judge the Judges interpretations of the King Code – and Section 252of the Companes Act?

Shareholders own shares and not companies! These shares give them rights that Jensen has convinced some are equal to ownership. Perhaps it was a simplification that is no longer fit for purpose.

End of comments.



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